Five myths about free enterprise

By Arthur Brooks,

by Arthur Brooks
The 2012 presidential campaign is shaping up to be a battle of two economic philosophies. One favors a greater redistributive and regulatory role for the government; the other prioritizes the values of free enterprise, including private property, individual liberty and limited government. Given the economic hardships the United States has endured in recent years, it is tempting to conclude that free markets are no longer best for us — but that would misread our history, and buy into myths about the impact of free enterprise.

1. Free enterprise hurts the poor.

The Occupy Wall Street movement of 2011 and plenty of politicians would have us believe that the free-market system is a contest between the ultra-rich and everyone else (the “99 percent”). But in fact, there never has been a greater force for helping the poor than free enterprise.

Since 1970, the percentage of the world’s population living on the equivalent of less than a dollar a day has fallen by more than 80 percent. Hundreds of millions of people have been pulled out of grinding deprivation.

This miracle was not the result of U.N. development projects or U.S. foreign aid. It was free trade, rule of law, property rights and entrepreneurship that achieved this miracle. In China alone, free trade and foreign investment lifted 400 million Chinese out of absolute poverty between 1981 and 2001.

Whatever the Occupy movement claims, every American earning more than $34,000 a year is in the world’s top 1 percent, as World Bank economist Branko Milanovic calculates in his book “The Haves and the Have-Nots.” Americans make up less than 5 percent of the planet’s population, but we’re about half the members of the world’s 1 percent. And we’ve accomplished that through our commitment to free enterprise.

2. Free markets are driven by greed.

I once asked Charles Schwab how he built the $16 billion investment company bearing his name. He never said a word about money. He spoke instead about accomplishing personal goals, creating good jobs for employees and the sacrifices along the way — including when he took a second mortgage on his home so he could make payroll.

Entrepreneurs are rarely driven by greed. According to Careerbuilder.com, in 2011, small-business owners made 19 percent less money per year than government managers. And as Northwestern University business professor Steven Rogers has shown, the average entrepreneur fails about four times before succeeding.

Free markets and entrepreneurship are driven not by greed but by earned success. For some people, earned success means business success, while for others, it means helping the poor, raising good kids, building a nonprofit, or making beautiful art — whatever allows people to create value in their lives and in the lives of others.

Earned success gets at the heart of “the pursuit of happiness.” The General Social Survey from the University of Chicago reveals that people who say they feel “very successful” or “completely successful” in their work lives are twice as likely to say they are very happy about their overall lives than people who feel “somewhat successful.” And it doesn’t matter if they earn more or less; the differences persist.

3. Free enterprise breeds envy.

Americans don’t resent the wealthy. In a poll in April, the Pew Research Center found that 88 percent said they admired people who get rich by working hard.

This is one way the United States is exceptional. In the World Values Survey conducted between 2005 and 2007, researchers asked people in 54 nations whether success flows from hard work or from luck and connections. Americans were more likely than people in other developed countries — twice as likely as the French, for example — to say success comes from hard work.

In a society that rewards initiative and offers opportunity, free enterprise fosters aspiration and ambition. In a social democracy with economic stagnation, you find envy, resentment, unrest — just look at Greece and Spain, where people are demanding government benefits instead of demanding to keep more of what they earn.

4. The free market caused the financial meltdown.

It wasn’t free enterprise that was at fault; it was the lack of free enterprise. Statism and its co-dependent spouse — corporate cronyism — melted down our economy.

As my American Enterprise Institute colleague Peter Wallison has documented, two decades of misguided government policy contributed to a massive bubble in housing. When it began to deflate, so did the whole financial system. And who showed up first in the bailout line? Large corporations, including car companies and mortgage giants Fannie Mae and Freddie Mac. Find me an opportunistic politician chumming the waters with tax loopholes, and I’ll show you a corporate shark.

This isn’t the free market at work — not even close. It’s a toxic mix of big government and its corporate clients. We need more free enterprise, not less — free enterprise where entrepreneurs put their money on the line and earn a profit or suffer a loss.

5. Free enterprise is unfair.

When I was an economics professor, my students would sometimes argue that it was “not fair” for the rich to have so much more than the poor. So halfway through the course, I proposed that a quarter of the points earned by the top half of the class be passed on to the students in the lower half, to improve grade equality. Unanimously, the students agreed that this would be unfair.

I didn’t have to spell out my point much.

Income redistribution is necessary to pay for the state and desirable to finance a social safety net, but as long as incomes are legitimately earned, redistribution is not intrinsically “fair.” For a majority of Americans, fairness means not redistribution, but rewarding merit — and that is what free enterprise does.

In 2006, the World Values Survey asked a sample of Americans to consider two similarly placed workers, one of whom was more reliable and efficient than the other. Was it fair, they asked, that the better one was paid more? Approximately 89 percent of respondents said it was.

And since 1973, the General Social Survey has asked Americans this question: “Some people say that people get ahead by their own hard work; others say that lucky breaks or help from other people are more important. Which do you think is most important?” For 40 years, between 60 percent and 70 percent of Americans have chosen “hard work.”

Unless you believe that Americans don’t earn their success, you must recognize that free enterprise makes our nation more fair.